BEVERLY HILLS, February 14, (THEWILL) – Amid flourishing outlook of Nigeria’s equity market which earned it the best performing Stock Exchange in the world as at 2020, the nation’s bourse hosted a bunch of dormant equities worth over N395 billion in total market capitalization that created no material value for the investors – an investigation by THEWILL has revealed.
The dormant equities, numbering 53 (companies), cut across 8 sectors of between 2 and 15 companies each, with market capitalization ranging from N5 billion to N114 billion per sector among the 144 companies listed on the Equity Main Board. The stocks of the affected companies recorded no price movement (either buying or selling) in 2020 – thus reflecting a state of dormancy during the review period.
At the current exchange rate of N379/USD at the Investors’ & Exporters’ Foreign Exchange (I&EFX) Window, this is roughly about $1.05 billion.
Practically, the values of the dormant equities were static in the ‘opening’ and ‘closing’ share prices as well as market capitalization in their Year-to-Date (YTD) figures as at December 31, 2020 – recording no capital gain or dividend during the period. “The implication is that the equities created no material gains for their investors, added no value to the companies, no fee income for the Stock Exchange and no impact on the economy generally during the period”, said Mike Uzor, a finance analyst.
Furthermore, the investors’ assets in these equities have drastically depreciated over time; while the equities did not count among the gains of the Nigerian bourse as the world’s best performing Stock Exchange in 2020. It also suggests that the companies have been inactive and have not filed the prescribed statutory returns with the NSE, suggesting further that the investors have nothing to show for being stakeholders in a publicly quoted company.
Analysis of the data published by the NSE at the end of 2020 trading year, revealed that the Financial sector recorded 15 companies, the highest with dormant equities. This is followed by the Industrials 9 dormant equities, Consumer Goods, Consumer Services and Health Care sectors with 6 dormant equities each. The Basic Materials, Oil & Gas and Technical sectors recorded 5, 3 and 2, dormant equities (companies) respectively.
By value, Basic Materials sector recorded the highest figure of N116.26 billion, followed by Oil & Gas and Consumer Services with N83.41 billion and N58.56 billion respectively. The Consumer Goods sector had N55.07 billion, Financials N50.75 billion, Technical N12.00 billion and Industrials N11.94 billion dormant accounts. The Health Care Sector recorded the least with 5.56 billion during the review period.
Of course, 2020 witnessed the worst global economic challenge in about a century through the Covid-19 pandemic which created an unparalleled global macro-economic shock of uncertain magnitude with brutal corporate (financial) distress, and huge stress on the financial system. The twin grave impacts: global crisis of a health pandemic and economic shrink from prolonged lockdown, were quite severe.
However, a closer look at the historical performance of the dormant equities showed that only a few can be categorised as real victims of the Covid-19 pandemic. Many had been in a distress mode for a long time before Covid-19 pandemic. Further periscope points to a long period of inactivity in their sectors and little or no contribution to economic growth.
Companies like Thomas Whyte, Juli Pharm, Pharma Deco, DN Tyre, Studio Press, SCOA, Roads Nigeria Ltd, Union Homes, Tantalizers, among others, are still listed in the Equity Main Board of the NSE showing figures that are part of the total market capitalization of the Stock Exchange.
In recent past the Insurance sub-sector dominated the dormant equities in the Financial sector and the market as a whole. However, government policies such as re-capitalization, aggressive implementation of the Compulsory Insurance Scheme and wider opportunity to play in the Local Content Development initiative, contributed significantly in reviving the large number of dormant equities that used to litter the Insurance sub-sector. Only a few insurance companies are now stuck in the miry clay of dormant equities compared to what used to be in 2017. Companies in the ‘Other Financial Service’ sub-category such as Mortgage banks, Savings & Loans and Microfinance banks constitute the bulk of the dormant equities in this category.
The fate of some dormant equities in 2020 can be seen as temporary due to a combination of factors such as the Covid-19 pandemic, #EndSARS protest, prolonged border closure as well as the recession. However, many companies slipped into dormancy due to poor or “rascally” management that has distanced them from genuine investors. Their inauspicious corporate governance culture is adjudged legendry and detrimental to an organization with appetite for world-class status.
Stakeholders and industry experts maintain that the dormant equities add no corporate value to the companies and do not offer a window for stockbrokers and the NSE to earn commissions and fees. They do not yield tax revenue for the government either. They are also seen as creating untrue picture of the flourishing Exchange because their dormant values are part of the overall market capitalization of the equity market.
Stockbroker and Vice President at Planet Capital, Mr Paul Uzum, confirmed that many of the dormant equities are companies that are not doing well and do not appeal to investors. He apportioned some blame to their directors who would rather invest in other viable stocks than endeavour to revive their distressed firms. He believes strongly that the dormant equities should not be allowed to continue to occupy space in the Stock Exchange.
“Many of such companies are not doing well. They do not file returns and when they file, they always bring losses. So, investors know them. Their directors invest in stocks too, but buy only the quality stocks, not their poor performing company’s. The Exchange owes the public a duty to weed off such listed firms from the market”, Uzum told THEWILL in a note.
The National Chairman, Trusted Shareholders’ Association of Nigeria (TSAN), Alhaji Mukhtar Mukhtar, said, “Lack of price movements, especially the upwards trajectory, will mean that investors are losing value. It may also be a fortune for people with monies to invest in stock of their preferences at lower prices. Of course, when 53 companies with market capitalization of over N395 billion are dormant, it means that those sectors are not contributing to the economy. Jobs and businesses are lost, which is bad for any company. But it could trigger a spate of mergers and acquisitions. We hope the fortunes of some of these companies will significantly change in the year,” Muktar said in a note to THEWILL.
The National Co-ordinator, Progressive Shareholders Association of Nigeria, PSAN, Mr Boniface Okezi, blamed the regulatory authorities. He advised the Securities and Exchange Commission (SEC) and NSE to closely monitor the listed companies and find out what challenges they may have that could lead to their being dormant in the equity market.
According to him, the Covid-19 pandemic offers opportunity for listed companies in the Health Sector to invest in reviving and upgrading their facilities to play a key role in the fight against the pandemic, either as manufacturers of drugs or raw materials for drugs, disinfectants, or other products. “The companies should be compelled to hold AGMs to tell their shareholders and regulatory authorities what their challenges are with a view to reviving them and putting them back to work. It is in the interest of all parties,” Okezie said in a telephone interview.
Investigation showed that dormant stocks have far-reaching implications on the investors’ assets, the company, the capital market and the investment community. For the investor, a dormant equity represents trapped asset; investment in this category earns no value by way of dividend or capital gain. It represents a “wrong” investment decision and could be counted as a loss because, over time, the asset yields no value to justify the investment.
It is also a measure of the company’s performance. Listed companies whose stocks witness little or no price movement means that the organisations lack breath; and may be living on life support. Over time, no annual general meeting (AGM) is held and employees of this organisation do not earn a quality living. Survival and competition are by extra struggle while enhanced career progression is often a mirage. Majority of companies in this category run afoul of post-listing requirements of the NSE such as timely disclosure of financial performance.
The NSE penalty for default in timely disclosure of financial performance is punitive. The rules state that: “Any late submission of accounts shall attract a fine of One hundred thousand Naira (N100,000) per week from the due date until the date of submission. A listed company which contravenes any of the provisions of the Listing Rules and General Understanding and fails to pay the penalty imposed on it for such contravention on or before the due date shall be liable to a further fine of three hundred thousand Naira (N300,000) in addition to twenty-five thousand Naira (N25,000) per day for the period the violation continues.”
For the capital market and the investing community, dormant equities represent a drag on the rallying move of the stocks. They impose on the authorities the challenge of multi-administrative costs, both in material and in man hour and in monitoring their compliance behaviour. Dormant equities do not attract positive perception from foreign investors concerning the economy and the regulatory bodies because of their lag in the overall profitability of the capital market.
“The earlier we delist these stagnant stocks from The Exchange, the better for the market. These firms exist to absorb the value of investors’ assets and make the equities market look like a place to experiment how to invest one’s money”, said Bamidele Ogunleye, a Stockbroker in Lagos.